Description
Exploring the Effectiveness of Financial Ratios in Predicting Corporate Bankruptcy: A Multi-Method Approach
Abstract
Corporate bankruptcy prediction is a significant issue in finance, traditionally used with financial ratios. Moreover, the research uses a multi-method approach to evaluate historical data quantitatively. Therefore, it emphasizes qualitative insights from industry experts. This provides a full understanding of the predictive power of the ratios and their practical applications. Additionally, it presents the terms of how well a variety of monetary ratios predict financial distress in different industries. The quantitative part analyzes historical financial data using regression analysis and statistical tools.
Comparatively, machine learning models calculate the predictive power of the ratios. Subsequently, it also estimates the performance regarding different types of economic conditions. This two-stage analysis brings out the strengths and weaknesses of economic ratios used in the prediction phase. Moreover, the qualitative study includes the views of financial analysts, risk managers, and industry professionals. In addition, applying structured interviews could look at professionals’ interpretation in actual decision situations regarding the usage of economic ratios. Such views add additional context in determining how ratios will be used with other measures of monetary reporting.
The significant findings indicate that economic ratios should be predicted and their reliability changes with industry are observed. For instance, the influence of such factors depends on external aspects. Specifically, those related to general macroeconomic trends and firm-specific conditions. The research emphasizes the limitations of merely relying on monetary ratios and demonstrates the merits of including expert judgment in risk analysis. Additionally, the study gives a comprehensive insight into bankruptcy prediction by integrating qualitative insights with the quantitative modeling process. Finally, the contribution of this study is to develop better strategies for risk assessment. Overall, it helps firms modify their financial analysis techniques to become more accurate decision-makers
Read more about the topic
Financial ratios and bankruptcy predictions: An international evidence
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